Does MAS Do a Good Job in Regulating Singapore’s Banking Sector?

Hank Greenberg, the former CEO of American insurance giant, AIG gave an interview with the Motley Fool in the US where he praised Singapore?s financial industry regulators as ?terrific? and ?intelligent?. Greenberg criticised American regulators like the Securities and Exchange Commission (SEC) for allowing banks to leverage their capital by 40 to 1 ? that?s borrowing $40 for every $1 of asset ? during the Global Financial crisis of 2007/2009 and compared local regulators favourably against the SEC.

The Monetary Authority of Singapore (MAS), which regulates financial institutions operating in Singapore, does indeed run a very tight ship. The aftermath…

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Hank Greenberg, the former CEO of American insurance giant, AIG gave an interview with the Motley Fool in the US where he praised Singapore’s financial industry regulators as ‘terrific’ and ‘intelligent’. Greenberg criticised American regulators like the Securities and Exchange Commission (SEC) for allowing banks to leverage their capital by 40 to 1 – that’s borrowing $40 for every $1 of asset – during the Global Financial crisis of 2007/2009 and compared local regulators favourably against the SEC.

The Monetary Authority of Singapore (MAS), which regulates financial institutions operating in Singapore, does indeed run a very tight ship. The aftermath of the Global Financial Crisis resulted in the need for tighter supervision and risk controls for banks worldwide, which has since led to the introduction of the Basel III minimum requirements on Capital Adequacy Ratios (CAR). The CAR measures how much ‘cushion’ a bank has for potential losses and the higher the ratio, the thicker the cushion. Basel III’s minimum requirement for Total CAR is 8% but the MAS notched up their own requirements to 10%.

This has led to banks in Singapore being conservative with their capital, even more so than MAS’s requirement. Local banking stalwarts DBS Group Holdings(SGX: D05), Overseas-Chinese Banking Corporation (SGX: O39) and United Overseas Bank (SGX: U11) all have Total CARs higher than MAS’s requirement of 10% – they stand at 17.1%, 18.5% and 19.1% respectively. While conservatism might mean lower profit for banks due to lower risk-taking, it might not be a bad thing at all.

During the Financial Crisis that started in 2007, the three aforementioned banks held up admirably even as financial institutions in USA and Europe were fighting for their lives. UOB’s profit in 2008 fell by only 24.6% from 2006 while DBS and OCBC suffered low-to-mid teen percentage declines. In contrast, the American bank, Citigroup suffered a US$27.7b loss in 2008 after having a profit of US$21.5b in 2006.Apart from the local banks’ praise-worthy risk management, MAS’s regulatory framework also contributed to their stability. So, conservatism is really not a bad thing at all even though a side-effect is a well-known local gripe of our notoriously low savings-deposit interest rates of around 0.05%.

Banks live and die on confidence. A bank run occurs when large numbers of depositors withdraw their deposits because they are no longer confident that the deposits are safe with the bank. This can lead to the bank suddenly staring at bankruptcy because of a lack of capital. Good regulatory oversight can prevent excessive risk-taking in financial institutions, leading to preservation of confidence even in difficult times and higher level of overall stability for the economy. For that, we have the MAS to thank for.

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The Motley Fool’s purpose is to help the world invest, better.The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.

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